ChemChina to take the M&A road to success

Pirelli acquisition bid could bring about 'revolutionary' change to group's tire business

Being a long-term industrial investor rather than simply a financial investor is what Ren Jianxin, the 57-year-old chairman of China National Chemical Corp, has in mind when he does a deal overseas.

A case in point is ChemChina's bid to acquire Milan-based Pirelli & C. SpA, the world's fifth-largest tire producer. If the deal valued at 7.4 billion euros ($8.1 billion) goes ahead in its entirety, it will make the state-owned chemical giant a controlling shareholder, with a 65 percent stake in one of the oldest Italian industrial brands.

But bidding to become the majority owner of a company with a history of nearly 150 years can be stressful. Ren said that he is concerned about a potential hostile counterbid that could disrupt the long-term strategy of Pirelli.

"Excess liquidity is sloshing around the markets, and the cost of capital is low. I am concerned that an irrational competing bid would hurt Pirelli's long-term interests," he says in a recent interview.

However, Marco Tronchetti Provera, chief executive of Pirelli, says that the company has not been contacted by any other potential bidder.

Another pressure for Ren is how he can maintain the legacy of Pirelli's brand value and corporate culture as well as its technological and management advantages in the tire industry.

"As a majority shareholder, I cannot afford any damage to the reputation of Pirelli," he says.

The solution Ren has offered is to maintain the autonomy of Pirelli. He would keep the existing management team, including Provera, in place.

Ren used the metaphor of Italian pasta and Malan Noodle, a restaurant chain owned by ChemChina, to describe the relationship between Pirelli and his company.

"Pirelli will be Pirelli. The Italian nature of the company will not change, although we are the investor," he says.

In addition, Ren says there are no plans for job cuts. "We need more people so that we can expand output and increase our market share."

Pirelli's research and development center and its headquarters would remain in Italy.

Under the terms of the proposed transaction, a "super-majority" equal to 90 percent of the share capital could authorize a move by the headquarters and the transfer to third parties of Pirelli's intellectual property.

Ren says the deal would result in "revolutionary" change to ChemChina's tire business.

Pirelli would spin off its low-profit industrial tire business, merging that division with a unit of the ChemChina family, tire company Aeolus Tire Co Ltd, which is owned by ChemChina's subsidiary China National Tire &Rubber Co.

Aeolus, a middle-ranking tire producer in China, would become the world's fourth- or fifth-largest industrial tire manufacturer as a result of that move, according to Ren.

"Pirelli needs production scale for its industrial tires ... and expanding into China and Asia will ensure its sustainable growth," he says, noting that the Italian company already has a market share of about 80 percent in the global high-end commercial tire business.

ChemChina would benefit from Pirelli's technological, industrial and management expertise and its global distribution networks.

Michael Foundoukidis, an analyst with French investment bank Natixis SA, says that the Pirelli-ChemChina deal could shake up the tire manufacturing industry.

The fragmented Chinese tire industry, with more than 100 manufacturers, concentrates on the low and middle segments of the market. That focus on lower-cost products has made Chinese tires an easy target of anti-dumping investigations in recent years.

Ren said that ChemChina does not aim to flood the world with cheap Chinese-produced tires as a response to overcapacity in the domestic market. The company aims to move up the global value chain and in doing so, to become better able to compete in the domestic market, which is forecast to more than double in the next 10 years.

After the deal closes, ChemChina would seek to relist Pirelli in Italy as soon as possible, Ren said. The company has been trading on the Milan Stock Exchange since 1922, but it would be delisted as a result of the transaction.

lixiang@chinadaily.com.cn

(China Daily Africa Weekly 04/03/2015 page23)